In this blog I will discuss.
- The FED day trading range
- Open Interest for the $SPY March 18 put and call options.
- The "Triple Witching" effect
- $SPY Moving averages, trend line resistance and the Bollinger Band indicator
- $VIX Bollinger Band
Today was the Federal Open Market Committee meeting and as expected there was a lot of volatility in the market. The market has continued to climb higher, and against my market outlook the bulls seem to be in control for now. One way I will gauge who controls the market (bulls or bears) is by watching the S&P 500 as measured the $SPY. What I'm looking to see is if $SPY trades above or below today's range, high of $203.82 and a low of $201.55. If the market is above the high the bulls will maintain control but anything below $201.55 becomes suspect and the point of control could easy fall into the bear's hands. If it remains in the middle than there is uncertainty.
The theory behind this idea is simple. If the Fed meeting instills confidence for investors the market should stay above the FED day high. If investors aren't confident with what the FED is doing to stimulate the economy the low will not hold as support.
Another important short-term consideration is this week's open interest level for $SPY put and call options. As I've previously discussed, the option strike price with the highest open interest can act as a gravitational pull. This this also referred to as the "max pain" theory, see blog.
The highest open interest for this week calls is at $200, and then $205.
The highest open interest for this week puts is at $195, and $200.
Since the $200 level has high open interest on both sides I'm suspecting a gravitational pull down to this level by this Friday might be in play. I do like this tool as a helpful indicator but keep in mind that this technique isn't a perfect signal and since Friday's option expiration day is a "Triple witching" we should expect a lot of volatility on Friday. Triple Witching is an event that happens in the market only 4 times a year, and contracts for stock index futures, stock index options and stock options will expire on the same day (3rd Friday in March, June, September and December). Typically, markets are quite volatile in this final hour as traders quickly offset their option/future orders before the closing bell. As a short-term trader this kind of event can easily whip you out of your positions so it's advised to position yourself wisely so you don't get stopped out of a longer-term trade. For more information check out this CNBC article.
Furthermore, chart elements have developed since my last blog about the$SPY can these indicator can help us plan for potential upward or downward targets.
- $SPY 200 day EMA (exponential moving average) is right at $200
- The next trend line resistance level is between $205-206
- The Bollinger Band has not been stretch above the upper band to indicate an extremely overbought situation.
The Bollinger Band on the $VIX has been stretch below the lower band. This means that volatility in the market is at an extremely low level. This indicator suggests that a "snap back" to normal levels is coming. In the chart below I've outlined areas when the $VIX has expanded above or below the upper and lower bands. At these points you can see the $VIX changes direction. If the $VIX snaps back into range and volatility increases the reciprocal is a lower stock market. The perfect setup for an extremely overbought market would be to have the $SPY above the upper Bollinger Band and the $VIX below the lower Bollinger Band. The opposite is true of extremely oversold conditions.For more info on Bollinger Bands check this out.
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